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HP Flexes for the Camera

New licensing agreement with Flextronics is a win-win for both companies.

This past weekend, my wife and I went to see a great band called Cowboy Mouth. It was the first time we've seen a live performance since our kids were born, and one of the more interesting changes I observed is that when the band is through performing, concert-goers no longer hold up a flickering lighter to signal their general approval -- they hold up cell phone cameras.

Traditions aside, I couldn't help but wonder at the wisdom of this if for no other reason than the low quality of the photos and video taken would seem to have limited utility.

Well, yesterday, Hewlett-Packard(NYSE:HPQ) announced that it had agreed to an exclusive five-year deal with Flextronics(NASDAQ:FLEX) -- a contract manufacturer of electronic components -- to license its digital imaging-processing technology in exchange for royalty payments. (The terms of the deal were not disclosed.)

The deal appears to be a classic win-win situation for both companies. For Flextronics, which already makes phones for Motorola(NYSE:MOT), Kyocera(NYSE:KYO), and Sony Ericson, it provides the company a way to upgrade mobile camera phones with the same high-quality capability that people expect from their digital cameras. (HP's technology works by capturing light and then refining it so that a 3-megapixel shot taken with a camera phone looks as good as one taken by a digital still camera.)

The benefit for HP, of course, is the royalty payments. According to industry analysts, the worldwide market for camera-enabled phones is expected to grow from 600 million in 2006 to almost 1 billion in 2010.

If Flextronics can capture even a portion of that growing number, the financial picture for both it and HP should become not only clearer and brighter -- it could have them feeling strong enough to flex for the camera.